In Shanghai, High Prices Keep Lid on Real-Estate Stimulus

SHANGHAI—A visit to Niu Huiju's tiny downtown apartment offers a glimpse of why the Chinese government is resisting calls to spark the real-estate market these days.

The slowdown in China's growth rate has increased pressure on the government to relax some restrictions—such as limiting how many properties a person can buy—that were imposed in recent years to cool the property sector.

Living on the Edge in Shanghai

Neighborhood children playing one evening. Darcy Holdorf for The Wall Street Journal

But in a central neighborhood where luxury apartments stand next to 1920s-era lane houses, Ms. Niu and her husband are crammed under the stairs of an old home in a windowless room that fits little besides their single bed and electric hot plate.

The 33-year-old waitress, who pays the equivalent of $50 a month in rent, simply wants indoor plumbing but doesn't see how she might elbow into much better quarters on her lowly income, much less afford to buy a place of her own. "The price of everything is going up," she says.

Despite China's explosion of new housing over the past decade, an estimated one third of China's 225 million urban households are without kitchens and plumbing, says Rosealea Yao of GK Dragonomics Research. Property prices have rocketed higher, and government measures designed to rein in speculation and price increases haven't had a big enough effect for people like Ms. Niu to benefit.

In Shanghai, authorities began launching such measures six years ago after sensing the market was becoming too frenzied, and both new developments and the rate of price increases have slowed. Meantime, authorities have subsidized more households through methods like encouraging developers to build more-affordable housing and banks to provide the financing.

But the government's restrictions on real-estate investment in Shanghai and nationally have gained more attention recently as the Chinese growth rate has slipped to 7.6% in the second quarter from rates exceeding 9% over the past decade. The slowdown is partly due to less investment in real estate and other property-related businesses. Property investment accounts for 8% of the gross domestic product, a large chunk of the world's No. 2 economy, estimates Standard Chartered economist Stephen Green.

Some analysts say government authorities have the tools to revive deal making and recharge growth: simply rescind some of the past policies. In Shanghai, for example, authorities only allow families to own up to two residences. Restrictions like those keep investors from buying apartments.

But so far, authorities have showed little inclination to relax these measures. Each time the government has taken a bullish step to stimulate the economy—like lowering interest rates—officials have continued to assert that property is too expensive for too many people.

The government is reluctant to lose the progress the housing measures have made, some analysts say. Price increases reached a plateau in 2010, after soaring 2.6 times in five years, according to analysts at Shanghai Urban Real Estate Surveyors Co.

Stephen Au, 45, who moved to Shanghai from his home in Hong Kong says the apartment he was thinking about buying six months ago is still available. "It's still the same price," he says.

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Also, this year, slightly more residential property was sold than built in Shanghai, reflecting how developers are working through inventories. By comparison, in 2011, developers built almost 1.5 times as much property in Shanghai as got sold. In the 15 years prior to 2010, most of the 1.3 billion square feet of residential space built by domestic developers and companies from Hong Kong and Singapore was sold before construction was even completed.

The apartments built in Shanghai in the past decade alone would fill more than 800 Empire State Buildings. But even with all the new construction, the amount of residential space per capita is tiny: only 17 square meters (183 square feet) per person. That is about the size of four king-size beds.

Looking forward, Chinese cities including Shanghai could require around 700 million square meters of residential property to be added annually, not far off the 717 million square meters built nationally last year, according to James Macdonald, head of China research at Savills in Shanghai. "China's going through a rough patch but the underlying trends are still there."

But high prices remain a hindrance for many potential buyers. The average price for homes in Shanghai in the first five months of this year was 22,000 yuan ($3,491) per square meter, just 1.7% below record highs in 2010, according to analysts at Shanghai Urban Real Estate Surveyors Co.

Today, the home-ownership rate in Shanghai is the lowest among China's 40 largest cities, according to an estimate by Chinese university researchers. The average Shanghai residence sold for the equivalent of $276,000 in 2011, impossibly out of reach for many residents of China's richest city, where the annual per capita income is about $13,000.

Li Xue's neighborhood in a new suburb located in a distant northwest corner of Shanghai has seen a flurry of speculative development recently with a parade of new 18-floor towers rising near her apartment complex. But Ms. Li remains a committed renter, un-swayed by pitches from developers that property values will rise. "Nowadays, people are smarter," she says.

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